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Ongoing Weakness in Architecture Billings Expected to Evaporate in Spring Thaw

Productivity at architecture firms should improve in coming years, spurred by improving economy and more experienced staff

By Kermit Baker, Hon. AIA
AIA Chief Economist

Business conditions at U.S. architecture firms showed signs of stabilizing in April, however the month’s Architecture Billings Index score of 49.6 still reflected a slight decline in billings from March levels once seasonal adjustments were factored in. This is the fourth decline in the past six months. Even while this protracted weakness in billings continues, there are signs that growth may be around the corner. The inquiries index reading was 59.1, the strongest showing for growth in inquires so far this year. Even more significantly, the new design contracts index for April was 54.6, the strongest reading for this index since the AIA began tracking this indicator in late 2010. These figures suggest that new project activity is materializing at architecture firms, but that progress on current design projects is moving at a disappointing pace.

Firms in the Northeast and Midwest continue to report the weakest business conditions. Scores at firms in both regions have been below the 50 threshold every month since the end of last year. With an ABI score of 42.9 in April, firms in the Northeast are reporting the steepest decline in billings since the depths of the last recession. Firms in the West reported a decline for the first time since mid-year 2012. In contrast, firms in the South are reporting accelerating billings, with the strongest gains since the last construction boom.

By construction sector, residential architects continue to report healthy conditions, while billings at commercial/industrial firms have been essentially flat for the past six months. Billings at institutional firms, while beginning to recover from mid-2012 to mid-2013, have now been negative for eight straight months, with accelerating declines for the past two months.

Economy expected to rebound from weak first quarter

The performance of the economy in the first quarter was extremely disappointing, but widely assumed to be a result of severe weather conditions across most parts of the country. The consensus is that the current quarter and the rest of this year will look more like the 3.0 to 3.5 percent growth in GDP seen in the second half of last year.

Recent payroll figures support this improvement. Net job growth was at 288,000 in April, the best showing since January of 2012. Improvement in the overall employment situation continues to boost construction employment. Through the first four months of the year, 124,000 net additional construction positions have been added to the industry, more than were added in all of 2012 and two-thirds as many as were added all last year.

On reason for the likely continued improvement in construction jobs is the recent rebound in home building activity. Through the first three months of the year, housing starts averaged 924,000 at a seasonally adjusted and annualized rate. April numbers showed a strong rebound, as starts jumped to 1,072,000, with most of the gain coming on the multifamily side. Rising consumer confidence scores, reflecting consumers’ generally growing comfort level with the economic outlook, should encourage further improvements in the housing market. Consumer sentiment levels, as tracked by the University of Michigan, are almost back to their pre-recessionary levels.

Firm productivity projected to increase

Even with inherent measurement difficulties, it appears that staff productivity at architecture firms—the output per hour of labor—has declined during this past downturn. With lean workloads coupled with frequent project delays, many firms have found it difficult to maintain the productivity levels of their staff.

Moving forward, over three-quarters of architecture firms expect productivity levels to increase over the next five years. Most others expect productivity levels to remain fairly constant. There are many factors that firms feel will affect future productivity levels. At the top of the list (selected by over a third of firms as the single most important issue in determining future changes in staff productivity) is the condition of the economy/project workloads. In the view of many firms, growing workloads will help to increase staff productivity levels. Close behind is the quality of the staff/staff training at firms. Well over a quarter of firms (28.3 percent) selected this as the single most important factor in determining future productivity levels.

Firm investments in technology—communications equipment, BIM, other software and hardware—was selected by more than one in every six firms as the key to future productivity gains. Almost one in 10 firms felt that firm management was the most critical factor in future productivity gains. Other factors at the top of the list for future productivity gains: types of projects that the firm worked on (suggesting that more familiar building types could be designed more productively than if the mix were changing); range of services and activities offered by the firm; and project delivery methods of firm projects. The remaining 2.5 percent selected other factors as being the key to productivity growth over the next five years.

This month, Work-on-the-Boards participants are saying:

  • General architectural work remains slow and stagnant, but planning and specialized (historic preservation) work seems to be somewhat steady and stronger over the past four months. —Six-person firm in the Northeast, mixed specialization
  • Inquiries/RFPs are well above last year. However, selections are slow, delayed, and projects are smaller than in the past. —170-person firm in the Midwest, institutional specialization
  • The slowdown is definitely behind us. Finding qualified staff is now our largest concern, followed closely behind by finding office space for staff once we hire them. —36-person firm in the West, institutional specialization
  • Business prospects have jumped over the past month. We still need to secure them into approved contracts, but inquiries and conversations are noticeably higher than they have been in a long time. —Four-person firm in the South, commercial/industrial specialization

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Recent Related:

The Winter Doldrums Drag On Through March at Architecture Firms

Architecture Firm Billings Increase Modestly in February

Architecture Firm Billings Rebound in the New Year

Architecture Firm Billings End 2013 on a Sour Note

 

Reference:

The ABI Work-on-the-Boards Survey Panel is open to any AIA member who is principal/partner of their firm. Apply to join the ABI panel by completing a brief background information form on your firm here.

 

About the AIA Architecture Billings Index:

The Architecture Billings Index (ABI), produced by the AIA Economics and Market Research Group, is a leading economic indicator that provides an approximately nine- to 12-month glimpse into the future of nonresidential construction spending activity. The diffusion indexes contained in the full report are derived from a monthly “Work-on-the-Boards” survey that is sent to a panel of AIA member–owned firms. Participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended, as compared to the prior month, and the results are then compiled into the ABI. These monthly results are also seasonally adjusted to allow for comparison to prior months. The monthly ABI index scores are centered near 50, with scores above 50 indicating an aggregate increase in billings, and scores below 50 indicating a decline. The regional and sector data are formulated using a three-month moving average. More information on the ABI and the analysis of its relationship to construction activity can be found in the white paper “Architecture Billings as a Leading Indicator of Construction: Analysis of the Relationship between a Billings Index and Construction Spending” on AIA.org

 

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